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Since the onset of the financial crisis, cash-strapped companies' in-house legal departments have tried a wide range of methods to bring down legal bills. Discounts on law firms' standard hourly rates have been pushed for, all manner of alternative billing methods tested and outsourcing work to offshore legal process centres has become an increasingly common phenomenon.
June 01, 2010 at 12:41 AM
5 minute read
Firms have been known to charge for some surprising things – so it can pay to analyse your bills. Alex Aldridge reports
Since the onset of the financial crisis, cash-strapped companies' in-house legal departments have tried a wide range of methods to bring down legal bills. Discounts on law firms' standard hourly rates have been pushed for, all manner of alternative billing methods tested and outsourcing work to offshore legal process centres has become an increasingly common phenomenon.
Amid all this innovation, however, there has been a tendency to overlook the simpler methods of reducing costs – like analysing legal bills to ensure that over-charging isn't taking place. According to Stephen French, managing partner of US-based Legalbill – one of a number of companies to have emerged over the last few years to cater to the demand for the auditing of law firms' bills – most legal bills that come into his company contain an average overcharge of around 12%, with some instances of firms overcharging by up to 40%. Jim Diamond, a UK-based legal costs consultant, cites similar figures, saying that, where overcharging has taken place, the average cost reduction on his client's bill is between 15-35%.
While there is no way to confirm such figures, conversations with general counsel suggest that being charged for things you wouldn't expect to pay for is commonplace, with plenty of stories about ridiculous legal bills out there. Writing in the Legal Week LinkedIn in-house lawyer group discussion forum, Suzanne Smith, UK & Ireland legal director at pharmaceutical company Genzyme, expressed her surprise at one firm billing "a succession of £25 charges for 10-second voicemail messages (as each was rounded up to their minimum single unit of six minutes) left by an associate who I was playing voicemail tag with over the course of a day". Needless to say, she continued: "We didn't pay for the voicemail messages and the firm almost lost my business as a result."
Meanwhile, TT Electronics general counsel Paul Felbeck recalls an instance from his private practice days where first-class flights for a partner (and his wife) were charged to the client after the partner returned early from fly fishing in Montana to take charge of a new matter. Not surprisingly, this eyebrow-raising move "soured the client relationship from the outset".
Then there was the "£20,000 for photocopying on a matter that completed three years ago" which one firm submitted to director of legal affairs at ITV Barry Matthews. "The bill also included the time and taxi fare for a trainee to deliver one box," Matthews recalls.
Legalbill's French says he has seen bills "for everything you can comprehend", including "dry cleaning, the purchase of luggage and admission to gentleman's clubs". More typical, though, are mark-ups on overheads that shouldn't really be marked up. "So," continues French, "the kind of thing you often see is firms adding 10% onto the fee of the consultant they instructed or maybe charging 4p per copy on photocopying that actually cost them 1p per copy."
Views over the most effective way of uncovering shady billing practices vary. French argues that it is important to go through bills manually, hence the employment by Legalbill – whose clients include Lufthansa, Chrysler and Federal Express – of legally qualified staff to do the reviewing. "That human element is incredibly important," explains French. "It's all about understanding the context of the bill, which is why we employ over 300 lawyers around the world to conduct our reviews." Not that outside help is always necessary: "I personally go through every invoice myself," comments Associated Newspapers general counsel Harvey Kass.
But others believe the review process can be done more effectively by software, particularly where the company involved has a high legal spend, thus generating lengthy and complex bills. Coca-Cola, for example, uses an automated system known as 'LegalPrecision', provided by LexisNexis, to vet the legal bills coming into its US operation. The system is programmed in advance with the billing policy to which the respective firm has agreed to adhere. It can contain variables such as whether or not photocopying is included in the price and, where travel is involved, whether the agreed means is first class or economy. Other similar systems include Serengeti, used by companies such as Google, Nike and Thomson Reuters, and DataCert, whose clients include AOL and Microsoft.
Pulling up law firms over their bills has its downsides, though. "Having third parties analysing bills is not great for lawyer-client relationships," says Bupa general counsel Paul Newton. It also implies a lack of mutual trust – something that, in an ideal world, would have been carefully fostered at an earlier stage. Kass sums up the general feeling of in-house lawyers when he explains that "analysing every hour and every minute carries with it the assumption that there is something more profoundly wrong in the relationship." Plus the process is costly in itself: Legalbill charges 3.5% of fees and costs on each bill it analyses, while Diamond charges between £150-£175 per hour (although the vast majority of his work is conducted on a fee-per-job basis).
But if relations break down, as they inevitably do at times, most general counsel acknowledge that the threat of an external audit team is a handy stick to be able to wave. Kass adds: "I've never reached the point of having to go externally to have costs analysed, having instead resolved problems through dialogue, but the options available in the market have the potential to act as useful leverage."
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